Wednesday, March 5, 2008

The first and second-generation reforms have created a conducive environment for foreign investments in India. Market oriented policies are boosting economic activity, all round development and GDP growth rate. Government procedures are constantly being simplified and paper work minimised. As the Indian economy gears for competition in the international market, overseas investors clearly see the potential for attractive returns from investments in India, which is also evident from the many FDI success stories already achieved.

Policy Framework

Industrial Policy

The Indian Government’s market liberalisation and economic policy reforms programme aims at rapid and substantial economic growth and integration of the country’s economy with the global economy. The industrial policy reforms have eliminated the industrial licensing requirements except for certain select sectors, removed restrictions on investment and expansion and facilitated easy access to foreign technology and direct investment.

The Industrial Policy Resolution of 1956 and the Statement on Industrial Policy of 1991 provide the basic framework for the Government’s overall industrial policy. The procedures for obtaining government approvals have been progressively simplified and quickened. Normal FDI proposals are cleared within a month. Areas earlier reserved for public sector have mostly been opened for private sector participation also.

Industrial Licensing

All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for the following:

• Industries reserved for the Public Sector;

• Industries retained under compulsory licensing;

• Items of manufacture reserved for the small scale sector; and

• Any proposal attracting locational restriction.

Industrial undertakings exempt from obtaining an industrial license are required to file an Industrial Entrepreneur Memoranda (IEM) with the Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion.

Foreign Investment Policy

Foreign investment is permitted in virtually every sector, except those of strategic concern such as defence (opened up recently to a limited extent) and rail transport. Foreign companies are permitted to set up 100 per cent subsidiaries in India. No prior approval from the exchange control authorities (RBI) is required, except for certain specified activities. The investment should be in accordance with the prescribed guidelines and the details of the investment should be filed with the authorities within the prescribed time limit. This procedure is applicable only for fresh investments directly in Indian companies and not for purchase of shares from the existing shareholders. This investment procedure is commonly known as the "automatic approval route".

Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.

Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and State Governments) and in monitoring implementation of projects. It also notifies all Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups. The SIA website (http://siadipp.nic.in) provides for chat time during fixed hours when all questions are answered. During other times, investors are encouraged to write e-mails and the Secretariat assures a reply within 24 hours.

In order to give further impetus to facilitation and monitoring of investment, as well as for better coordination of infrastructural requirements for industry, a new cell called the "Investment Promotion and Infrastructure Development Cell" has been created.

Regulation and procedures

Procedures for obtaining government approvals have been considerably simplified. Approval procedures have been laid out for undertakings that are

• small scale units exceeding the prescribed limit of investment in plant and machinery and continuing to manufacture small scale reserved item(s) or, in cases where exemption from industrial licensing granted for any item, is withdrawn.

Automatic approval route and FIPB route

• Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy of the Government of India and the Foreign Exchange Management Act, 1999 (FEMA). With increasing liberalisation of the Indian economy, generally, there is no need to obtain prior approval of the Government of India for a fresh investment to be made into an Indian company (only procedural filings have to be made with the Reserve Bank of India (RBI), the Indian central bank). In certain cases, however, and also for investment in certain specified sectors, prior approval is required. Further, investment in certain specified sectors, is subject to foreign equity caps.

New ventures

All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas Corporate Bodies (OCB) fall under the Automatic Route except those that expressly require a prior Government approval.

An investor may, if so prefered, choose to make an application to the FIPB and not avail of the automatic route.

Investment in Public Sector Units as also for units located in Export Oriented Units (EOU)/Export Processing Zones (EPZ)/Special Economic Zones (SEZ)/Electronic Hardware Technology Parks (EHTP)/ Software Technology Parks (STP) would also qualify for the Automatic Route. Investment under the Automatic Route is governed by the notified sectoral policy and equity caps and RBI ensures compliance of the same.

Any change in sectoral policy/sectoral equity cap is notified by the SIA in the Department of Industrial Policy & Promotion.

Existing Companies

Besides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies to induct foreign equity. For existing companies with an expansion programme, the additional requirements are that:

• the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors;

• the money to be remitted should be in the sector(s) under the automatic route.

Otherwise the proposal would need Government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company.

For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are that:

• they are engaged in the industries under automatic route (including additional activities covered under the automatic route regardless of whether the original activities were undertaken with Government approval or by accessing the automatic route);

• the increase in equity level must be from expansion of the equity base; and

• the foreign equity must be in foreign currency.

Equity participation by international financial institutions in domestic companies is permitted through automatic route subject to Securities Exchange Board of India (SEBI) /RBI regulations and sector specific caps on FDI.

Indian companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.

Government approval (FIPB route)

For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary:

• All proposals requiring an Industrial License.

• All proposals in which the foreign collaborator has a previous venture/tie-up in India in the same or allied field. However, this condition is not applicable for proposals in the Information Technology industry.

• All proposals relating to acquisition of shares in an existing Indian company.

• All proposals falling outside notified sectoral policy/caps or under sectors for which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.

Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. These Companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.

Foreign Investment in the Small Scale Sector

Small Scale Undertakings (SSUs) are defined as units having investments in fixed assets in plant and machinery of not more than INR 10 million. Under the small scale industrial policy, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be obtained.

A SSU manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. However, if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license.

Foreign Investment Policy for trading activities

Foreign investment for trading is permissible under the automatic route up to 51% foreign equity, and beyond this by the Government through FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force. However, under the Government route, 100% FDI is permitted in case of trading activities carried out in certain specified sectors such as hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.

FDI upto 100% is also permitted for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world.

Indian companies are allowed to raise equity capital in the international market through the issue of GDRs/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government’s approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the prescribed percentage for automatic approval, or which is implementing a project not contained in project falling under Government Approval route, would need to obtain prior Government approval. Foreign investment through preference shares is also treated as foreign direct investment.

State Level Project Implementation

India has evolved a comprehensive organisational structure at the state level for industrial development. In most states the organisations present to assist and promote industries are:

• Investment Promotion Agencies (IPA)

• State Industrial Development Corporation (SIDC)

• Small Scale Industries Development Corporation (SSIDC)

• State Financial Corporation (SFC)

• District Industries Centre (DIC)

• Single Window Service and Escort Service

Several state governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get the required approvals. ES is targeted at large and medium sized projects and one individual is assigned from one of the state government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.

Investment Incentives

The state finances a part of the fixed capital cost of the project. Various states have designated areas as ‘A’, ‘B’ and ‘C’ according to their levels of development. The level of incentive provided by a state varies and is generally larger for investment in backward areas. Further, the terms and ceiling of the incentives vary across states, depending on the nature of industry that the state is trying to promote.

Power Tariff Incentives

Power tariff incentives are extended by state governments in different ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for purchase and installation of captive power generation sets.

The actual incentives given vary across states and from industry to industry and are also dependent upon the area in which this unit is set up. Some states specify a list of industries, which do not qualify for some of these incentives.

Other Incentives

Some states extend other incentives to small-scale units or priority industries as defined in their industrial policy statements. Such incentives include concessional loans granted by State Financial Corporations, price preference on goods made by Small Scale Industries (SSIs) in purchases made by government and semi government organisations, exemption from the payment of octroi (entry tax) for a certain specified period, preferential allotment of land and sheds in industrial areas to SSIs and grant of interest free loans in lieu of deferred sales tax.

A few states have taken the initiative to streamline the investment approval process by introducing common application forms for various approvals. A ‘green channel facility’, has been introduced in some states, where applications required for clearances will be received and processed through various institutional offices on a time bound basis.

Policy framework

Most FDI activities permitted for foreign direct investment are placed on the automatic route. Under this the applicant company has only to notify the Reserve bank of India within 30 days of inward remittance of funds and again within 30 days of issuing shares to the non-resident investor. Some salient features of the FDI policy are:

• Original investment as also the returns on investment are fully repatriable

• Payment of fee and royalty to foreign technology provider is permitted including that by a wholly owned subsidiary to its off-shore parent company

• Payment of royalty and use of trade marks and brand name without transfer of technology is also permitted

• FDI is not permitted in the areas of agriculture and plantations other than the tea sector, real estate business other than development of integrated townships and settlements, retail trading, atomic energy, lottery business, gambling and betting sectors.

Foreign Investment Implementation Authority (FIIA)

The Government of India has set up the Foreign Investment implementation Authority (FIIA) to facilitate the process of translating FDI approvals into implementation. The agency provides services to foreign investors to help obtain necessary approvals, sort out operational problems and seek intervention of various government agencies to find solution to their problems.

The functions of the FIIA are as under:

• Expediting various approvals/permissions;

• Fostering partnership between investors and government agencies concerned;

• Resolve difference in perceptions;

• Enhance overall credibility;

• Review policy framework; and

• Liaise with the Ministry of External Affairs for keeping India’s diplomatic missions abroad informed about translation of FDI approvals into actual investment and implementation.

The FIIA acts as a single point interface between the investor and Government agencies including Administrative Ministries/State Governments/Regulatory Authorities/Tax Authorities/Company Law Board, etc.

Investment Promotion and Infrastructure Development (IP & ID) Cell

The functions of the Cell include: -

• Dissemination of information about investment climate in India;

• Investment facilitation;

• Developing and distributing multimedia presentation material and other publications;

• Promotion of Private Investment including Foreign Investment in the infrastructure sector;

• Compilation of sectoral policies, strategies and guidelines of infrastructure sectors, both in India and abroad; and

• Facilitating preparation of a perspective plan on infrastructure requirements for industry.

Entry strategy into India

A business presence in India may be established by a foreign entity through:

Company

A company may be incorporated, inter alia, using the following modes:

• Incorporating an Indian company with 100% foreign equity, operating as a wholly owned subsidiary;

• Incorporating a Joint Venture Company (JVC) with an Indian partner and/or with the general public and operating as a listed company; or

• Incorporating a JVC with an Indian partner and operating as an unlisted company.

Branch Office

A branch would mean an establishment carrying on substantially the same activity as its Head Office. Foreign companies intending to open a Branch Office (BO) in India need to obtain prior permission of RBI which would encompass even approval to the scope of activities that are intended to be carried out in India. As per the guidelines laid down by the RBI, the BO in India is allowed to carry on only the following activities:

• Export / Import of goods;

• Rendering professional or consultancy services;

• Carrying out research work, in which the parent company is engaged;

• Promoting technical or financial collaboration between Indian companies and parent or overseas group company;

• Representing the parent company in India and acting as buying / selling agent in India;

• Rendering services in Information Technology and development of software in India;

• Rendering technical support to the products supplied by parent / group companies;

• Foreign airline / shipping company

Liaison Office

A Liaison Office (LO) is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A LO is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels. The LO is permitted to undertake only the following activities:

• Representing in India the parent Company / group Company;

• Promoting export/ import from/ to India

• Promoting technical / financial collaborations between the parent / group companies and companies in India;

• Acting as a communication channel between the parent Company and Indian companies.

Any company intending to open a LO in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof.

Project Office

Foreign companies can establish Project Offices (POs) in India specifically for the purpose of execution of specific projects. A PO is similar to a branch office opened for the limited purpose of executing a particular contract. As POs are opened for undertaking a specific activity they cannot perform any other function or undertake any other activity. Generally, companies engaged in turnkey projects or installation projects set up POs. All expenses of POs must be met through inward foreign currency remittances if the rupee component of the contract, if any, is not sufficient to meet the said expenses. RBI approval is required to open a PO.

In infrastructure related marketing and marketing of petroleum products

For public sector undertakings

Investment through such vehicle is treated as resident equity

a. mining and mineral separation

b. value addition

c. integrated activities

For arms and ammunition and allied items of defence equipment, defence aircraft and warships

Private companies incorporated in India with permissible FII/ NRI/ OCB/ PIO equity within the limits to set uplinking hubs (teleports) for leasing or hiring out their facilities to broadcasters.

Footnote: As regards satellite broadcasting, all TV channels irrespective of the ownership or management control to uplink from India provided they undertake to comply with the broadcast (programme and advertising) code.

Foreign investment allowed up to 49 per cent (inclusive of both FDI and portfolio investment) of paid up share capital. Companies with minimum 51 per cent of paid up share capital held by Indian citizens are eligible under the Cable Television Network Rules (1994) to provide cable TV services.

Companies with a maximum of foreign equity including FDI/ NRI/ OCB/ FII of 49 per cent would be eligible to obtain DTH License. Within the foreign equity, the FDI component not to exceed 20 per cent

The licensee shall be a company registered in India under the Companies Act. All share holding should be held by Indians except for the limited portfolio investment by FII/ NRI/ PIO/ OCB subject to such ceiling as may be decided from time to time. Company shall have no direct investment by foreign entities, NRIs and OCBs. As of now the foreign investment is permissible to the extent of 20 per cent portfolio investment. No private operator is allowed in terrestrial TV transmission.

If FDI in an SSI unit exceeds 24 per cent of the paid up capital, the company looses its SSI status. Further, if the item/s of manufacture is/ are reserved for the SSI sector, the company has to obtain an industrial license and undertake a minimum export obligation of 50 per cent of annual production on such products.

**subject to guidelines notified by ministry of information and broadcasting periodically.

Foreign technology agreements

The RBI through the automatic route, within the following prescribed monetary limits, permits foreign Technology Agreements in all industries:

• Royalty up to 5 per cent on domestic sale and 8 per cent on exports is allowed by wholly owned subsidiary to offshore parent company.

• Lump sum payment not exceeding US$ 2 million

• Royalty not exceeding 2 per cent on exports and 1 per cent on domestic sale for use of the trade marks/ brand names

All other proposals for foreign technology agreement, not meeting any or all of the parameters for automatic approval, and all cases of extension of existing foreign technical collaboration agreement, are considered for approval, on merits, by the Government. Application in respect of such proposals should be submitted in the prescribed form to the SIA Department of Industrial Policy & Promotion, Ministry of Industry.

Facilitating alliances

While a number of foreign companies have established operations in the country on their own, others have successfully teamed up with local companies and leveraged their presence in the country. Many organisations help foreign organisations forge alliances with local companies. These include the Confederation of Indian Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) and consulting firms that in addition assist in chalking out entry strategies, undertaking feasibility studies, etc.

Indian embassies and missions abroad closely assist foreign investors in their initiatives to participate in various projects in India. ‘Escort services’ are provided to the foreign investor for realisation of the project.

Further information can be obtained at http://www. Bisnetindia.com and http://www.indian industry.com